(South-Western Federal Taxation 2026 Comprehensive Volume 47e by Young, Persellin, Nellen, Maloney, Cuccia, Lassar, Cripe) (838pages)

TABLE OF CONTENTS Problem 1 Solutions.............................................................................................................1 Problem 2 Solutions ........................................................................................................... 5 PROBLEM 1 SOLUTIONS 1. Diego reports his compensation of $85,000 on line 1 Form 1040. This includes his salary of $98,000 and the $6,000 bonus he received in 2026 (because he is a cashbasis taxpayer). This sum is reduced by the $19,000 contribution to his § 401(k) plan (taxation is deferred until he takes distributions from the plan). Diego’s salary is not reduced by his “contribution” of $7,200 to the group health insurance plan because it was made with after-tax dollars. Instead, this amount represents health premiums paid, which are included on line 1 of Schedule A as a qualifying medical expense (see item 9). Commuting expenses are generally not tax deductible, so Diego is not permitted to claim a deduction for his commuting mileage. 2. Isabel reports her income from her sole proprietorship on Schedule C (Form 1040). Her consulting income of $72,000 is reported on Part I of Schedule C. Since she uses the cash method of accounting for tax purposes, she includes the $3,000 receipt for work done in 2021 but not the $5,000 billed for 2026 work but not yet collected. The $6,400 uncollected receivable from 2020 cannot be deducted as a bad debt as Isabel has no basis in the item. As a cash-basis taxpayer, she never recognized any income. Her deductible business expenses (other than the cost of her home office) sum to $11,095 and are detailed as follows: • Line 9 $569 Car expenses for mileage occurring ratably throughout the year [(940 miles × $0.585 standard mileage rate × ½) + (940 miles × $0.625 × ½)] • Line 13 $800 Depreciation on the fireproof safe (from Form 4562, see item 3) • Line 22 $8,000 Supplies ($4,800 drafting supplies + $3,200 reproduction materials) • Line 23 $400 License fee • Line 27a $1,350 Other expenses [dues and subscriptions of $490 (journal subscriptions $250 + professional dues $240) and uniforms of $860 (work clothes); detailed on Part V, page 2]